Probabilities and Values of Early Exercise: Spot and Futures Foreign Currency Options

Posted: 16 May 2000

See all articles by James N. Bodurtha

James N. Bodurtha

Georgetown University - Department of Finance

Georges R. Courtadon

Morgan Stanley

Abstract

This article analyzes fundamental differences between American spot and futures options. These options differ in their early exercise probabilities and values, and in option buyers' exercise behavior. We find two key results: one theoretical and one empirical. First, unlike spot options, some futures options' early exercise probabilities and values do not correspond. Specifically, increased volatility raises the early exercise premium for in-the-money futures calls, but lowers the associated early exercise probability. Similarly, increasing the domestic interest rate raises the futures put early exercise premium, while lowering the associated early exercise probability. Second, observed early exercise experience of Philadelphia Stock Exchange spot options and Chicago Mercantile Exchange futures options is consistent with optimal early exercise behavior prescribed by a standard American option pricing model. Both types of option exercise events occur at or near the modeled early exercise boundaries.

JEL Classification: G13

Suggested Citation

Bodurtha, James N. and Courtadon, Georges R., Probabilities and Values of Early Exercise: Spot and Futures Foreign Currency Options. Available at SSRN: https://ssrn.com/abstract=6973

James N. Bodurtha (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-6351 (Phone)
202-687-4031 (Fax)

Georges R. Courtadon

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States
(212) 762-6220 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,156
PlumX Metrics